This seems to show the system working. Everpix was a reasonable idea with good execution, but nobody could see how it would be eventually profitable. That it didn't get funded is evidence that we're not in a bubble.
Thus, in their specific case, it's hard to make the case that it's a bubble. And if they are bleeding users away from Facebook, then FB will pay a premium to stop that bleeding. Thus the FB offer is not unreasonable, no matter how ridiculous it looks on the surface.
Now, if their user growth slowed for some reason, then yes they will be kicking themselves for not taking said offer. It has happened before - e.g. Friendster, etc. But those are usually self-inflicted wounds. Assuming their investors keep them from such moves, there is a good chance they can be a large sustainable company.
<opinion rel="armchair">Just looking at the two products, I think Snapchat's #1 business priority should be getting as big as possible as fast as possible, whereas I think Everpix's #1 business priority should've been to make the unit economics work.</opinion>
What if some "greater fool" came in and bought Everpix for $50 million, like Yahoo, or AOL? Then we wouldn't be coming up with all these reasons why they failed, but instead would've congratulated them on their hard work, smart strategy and success (funny how these things work, huh?)
If Facebook didn't buy Instagram, they would've had the same outcome as Everpix eventually. If eBay didn't acquire Hunch, they've flunked eventually. If Google didn't acquire Blogger, they would've sunked too. I'd love to see Foursquare survive for 4 more years without an exit.
Companies that haven't started monetizing can be more hand wavy about the potential revenue and growth.
It depends on the business and product.
First, Everpix had revenue, yes, but they had negative marginal profit (http://en.wikipedia.org/wiki/Marginal_profit). Since their business is based around charging customers $X/month, their unit economics are incredibly important. If I buy candy bars for $3 and sell them for $2 I can also show "real revenue," but nevertheless this is still a terrible business.
Second, what's a better business, Google + Adwords or Google + charging $5/month/user. The latter puts a tight upper limit on the total size of your market. Google is unquestionably more profitable with the former business model rather than the latter, but it took Google years of not being profitable before they made it happen. If you look up articles about Google in the late 90s they were filled with hand-wringing about how they'll make money. The same goes for Facebook, which I think most HN users still dismiss as a fad. Nevertheless, they're very profitable and have been for many years.
VCs care mostly about the size limiting case and how likely we are to reach that limiting case. You can say this is stupid, counterproductive, etc., but for whatever reason that's the course Everpix decided to pursue. The logic of VC investing makes sense and it was Everpix's decision to take that route vs. remaining small-but-profitable, assuming the latter was actually an option.
Third, we can also contrast SnapChat and Everpix's situation from a game-theoretic perspective. Let's say SnapChat was charging, I dunno, $5 to download the app. Conservatively, let's assume that had no effect other than X% fewer people downloading the app. So, fewer people download the app, but we now have a very, very nice gross margin. In fact, let's say there were 5 similarly-sized SnapChat clones, each charging the same amount.
What would you do if you were one of those competitors? I can tell you what I'd do — I'd make my application free and build up the largest network I possibly could, knowing that the main value users get out of a communication app/network is the number of people on the network with whom they want to communicate (cf. http://en.wikipedia.org/wiki/Metcalfe's_law).
Since a player in this hypothetical SnapChat space could improve their situation by changing their strategy unilaterally, we see that the "charge for SnapChat" situation is not in a Nash equilibrium and it'd be irrational for us not to adopt this new strategy ourselves.
Of course, this only works when the new strategy is viable — in this case, the "free for users" strategy. Because their marginal costs are much lower, it is significantly more viable for Snapchat than Everpix. Indeed, for Everpix it will just make their overall situation worse.
HN is too obsessed with bubbles. Too many people forget that the same bubble that gave us pets.com also gave us Google
To a VC yes. That's the business model of their fund. I think if Everpix had attracted a different class of investors they might have been more successful fundraising.
I can't say if they would have had more success with a free model. But in any case start ups are never a safe investment, and blocking adoption rates with a subscription fee certainly limits the appeal to a fund that has to see a potential for extremely high returns.